The Nation; Tuesday's Big Test: How Deep in the Heart of Taxes

By RICHARD W. STEVENSON

Published: January 30, 2000

WASHINGTON—
FOR decades, it has been an article of faith among Republicans that no issue is more politically powerful or truer to their ideology than tax cuts.

Now that orthodoxy faces one of its strongest challenges since Ronald Reagan brought the supply-side revolution to the G.O.P. The challenger is Senator John McCain of Arizona, who has audaciously taken Gov. George W. Bush of Texas to task at the beginning of the primary season for the big tax cut plan that is the centerpiece of his presidential campaign.

With the federal budget surplus swelling, taxes will no doubt remain an issue to some degree throughout the election. But the outcome of the New Hampshire primary on Tuesday could go a long way toward determining whether the traditional Republican message about cutting taxes has lost its potency in an era when voters seem inclined to use the current prosperity to address expensive long-term problems.

Casting himself as a true believer in tax cuts, Mr. Bush has not flinched. His differences with Mr. McCain, he said last week as he received the endorsement of Jack F. Kemp, one of the original supply-siders, pose ''a defining choice for our party.'' Mr. Kemp said the Arizona senator was ''turning the party away from Ronald Reagan and back to Herbert Hoover.''

For his part, Mr. McCain has continued to attack Mr. Bush's plan in terms redolent of both old-style fiscal conservatism and Democratic class warfare. He calls the proposed cuts too big, too tilted to the wealthy, too little focused on debt reduction and blind to the challenges of shoring up Social Security and Medicare.

Asked during a debate last week whether his approach was too much like President Clinton's to suit Republican voters, Mr. McCain did not blush, replying that perhaps Mr. Clinton's plan ''looks too much like mine.''

Of course, Mr. McCain's appeal in the famously anti-tax precincts of New Hampshire may derive more from his war hero background and his blunt-talking approach than from his stand on fiscal policy. But should he defeat Mr. Bush in the first head-to-head matchup between the two leading Republicans, it will clearly raise questions about the Texan's reliance on a tax-cutting message to carry him through the primaries, much less the general election.

Mr. McCain's approach, which includes smaller tax cuts than Mr. Bush's, is framed by the combination of current prosperity and long-term national problems. Few voters seem to be clamoring for tax cuts of a few hundred or even a few thousand dollars a year now because most are feeling flush; on Tuesday, as New Hampshire votes, the nation's current economic expansion will officially become the longest on record.

AT the same time, voters seem to have a visceral feeling that they should be planning now to ensure that the country's finances are put in order before the inevitable downturn. Support for reducing the national debt is far stronger than either party had expected, and poll respondents regularly say their top priorities are putting Social Security and Medicare on sound footing for the retirement of the baby boom generation.

These developments have given Mr. McCain an opportunity to redefine what it means to be a conservative in an age of plenty.

''I think it's conservative in good times to put money into Social Security,'' Mr. McCain said. ''It's conservative to pay down the debt. And it's conservative, clearly, to try to save Medicare and at the same time give these tax breaks to American families.''

Mr. McCain's strategy has set off a heated debate among Republican strategists and conservative thinkers. Most of them are more dedicated to tax cuts than ever, especially at a time when the federal surplus appears to be growing to astonishing heights. Last week the Congressional Budget Office projected that the surplus outside the Social Security system could reach $1.9 trillion over the next decade, nearly twice as much as projected six months ago.

True supply-siders say that tax cuts will not only keep the economy healthy, but that returning excess revenue to the taxpayers is the best way to stop the relentless growth of government. They point out that when the issue is framed as a choice between letting politicians spend the surplus and letting individuals choose how to use their own money, tax cuts get strong support in polls.

''The key is to link it to wasteful Washington spending,'' said Frank Luntz, a Republican pollster. ''That's when it becomes not only good policy but good politics.''

BUT other Republicans, even some who consider themselves supply-siders and support aggressive tax-cutting efforts, acknowledge that Mr. McCain may have tapped into a new politics of prosperity.

''In a time of prosperity such as now, the one thing people are more concerned about than anything else is not rocking the boat,'' said Bruce Bartlett, a former Treasury Department official in the Reagan and Bush administrations, ''and they are deeply skeptical of any ideas that seem large because large is seen as risky.''

''Rightly or wrongly, people have bought into the idea that big tax cuts are risky,'' Mr. Bartlett said. ''At the same time, people know instinctively that the good times won't last forever. They view paying down the debt as putting money in the national piggy bank and as the way you deal with the problems of the future.''

The wild card in the debate could be the surplus. Mr. McCain has already dismissed the estimates as guesses that should not be the basis for policy-making. And Democrats say the projections of a $1.9 trillion surplus are a fantasy because they are built on the unrealistic assumption that Congress will cut spending for the next decade.

Still, the numbers give Mr. Bush some measure of protection against charges that his $483 billion, five-year tax cut plan would be fiscally irresponsible. Even if he loses the New Hampshire primary on Tuesday, he will almost certainly stick to his message as the campaign leaves the state (where independents can vote in the primaries) for more traditional conservative battlegrounds.

Nonetheless, the debate on the campaign trail is beginning to percolate among Republicans in Congress. Speaker J. Dennis Hastert of Illinois has made eliminating the national debt one of the party's main goals, even as he has de-emphasized efforts to pass a sweeping tax cut, at least for now.

Republicans have not failed to recognize reality. With Mr. Kemp at his side, Bob Dole ran for president in 1996 on a tax-cutting platform and was beaten soundly by President Clinton. Mr. Clinton has subsequently blocked Republican tax-cutting efforts in Congress and tried to make Democrats the party of fiscal discipline.

But Republican analysts are clearly concerned about the potential for a debilitating split within the party if Mr. McCain's strategy succeeds.

''When a Republican uses the rhetoric of Democratic criticism against the G.O.P.,'' Mr. Luntz said, ''that's when you know you have an electoral problem.''

Photo: Republicans are divided over whether voters want tax cuts in a prosperous election year. (Gary Landsman/The Stock Market) Chart: ''It Depends on How You Ask ...'' The public's desire for tax cuts can be hard to measure. Pollsters asking what should be done with the nation's budget surplus got different results depending on the specifics of the question. THE QUESTION President Clinton has proposed setting aside approximately two-thirds of an expected budget surplus to fix the Social Security system. What do you think the leaders in Washington should do with the remainder of the surplus? ... Variation 1 ... Should the money be used for a tax cut, or should it be used to fund new government programs? TAX CUT -- 60% NEW PROGRAMS -- 25 OTHER PURPOSES -- 11 DON'T KNOW -- 4 Variation 2 ... Should the money be used for a tax cut, or should it be spent on programs for education, the environment, health care, crime-fighting and military defense? TAX CUT -- 22% PROGRAMS -- 69 OTHER PURPOSES -- 6 DON'T KNOW -- 3 (Source: Pew Research Center)